American Companies Hike Prices As Consumer Demand Soars

While businesses are already enjoying the benefits of lower taxes and regulatory relief from the Trump administration, they have yet another reason to celebrate, according to Bloomberg.

By pouring hundreds of billions of dollars of tax cuts and extra government spending into an already stretched economy, Trump is fostering an environment where firms such as conglomerate 3M Co. can raise prices because demand for their products is strong.

That’s a turn-around from the past decade, when executives often bemoaned their inability to lift prices because of their fear of sacrificing sales. The shift will help them pad profits that are already surging thanks to lower taxes. –Bloomberg

“The power is with the seller,” said IHS Markit chief business economist, Chris Williamson.

“Non-manufacturing firms told the Philadelphia Fed this month that they expect to raise prices 3 percent in the coming year, up from a 2 percent increase they forecast in May,” reports Bloomberg.

A separate survey of both manufacturing and non-manufacturing companies by IHS Markit found that their average selling prices rose at the fastest rate of the nine-year-old expansion in July before the pace eased a bit in August. –Bloomberg

St. Paul, Minnesota-based 3M for example hiked prices the most in over four years during the second quarter, and are “highly confident that our price increases will more than offset whatever we see for raw material headwinds for the year,” including tariffs, according to CFO Nicholas Gangestad.

Also noting the return of pricing power is the Fed, who mentioned it during their July 31 – August 1 meeting, according to the minutes. Fed Chairman Jerome Powell and colleagues can celebrate the fact that inflation “remained near 2 percent” in June – their desired rate.

Purchasing Power

And while businesses have enjoyed being able to ask more for goods and services, price inflation isn’t so welcome to consumers – whose wages have stagnated despite multi-decade low unemployment. Rising prices have already begun to erode already-strained consumer purchasing power – a point which some Democratic opponents of Trump have brought up ahead of midterm elections, reports Bloomberg.

Adjusted for inflation – average hourly earnings fell 0.2 percent in July vs. last year, the weakest reading since 2012.

The political debate highlights the chicken-or-egg question at the heart of the inflation process that’s been noted by Morgan Stanley Chief U.S. Economist Ellen Zentner and others: Which comes first — stepped-up price increases or bigger pay hikes?

Some economists argue that rising prices come first, as companies seize opportunities to buttress their bottom lines when demand is strong. Workers then seek higher wages to make up for the purchasing power they’ve lost to rising inflation. –Bloomberg

Labor Market

Thanks to a tight job market, some economists contend that companies have been prompted to boost salaries for coveted workers, which in turn causes firms to raise prices to cover growing wage costs, leading to the chicken-or-egg scenario in which the answer at the end of the day is inflation.

Data due Thursday are expected to show that inflation picked up in July. The personal consumption price index that the Fed targets probably rose 2.3 percent in July from a year earlier, the most in more than six years, according to the median estimate of economists surveyed by Bloomberg News. After stripping out volatile food and energy costs, the core index probably rose 2 percent in July, versus 1.9 percent in June. –Bloomberg

Trump’s brewing trade war may compound the price hikes, however – after the president slapped tariffs on a variety of imports from China and elsewhere – raising costs for businesses, and thereby putting pressure on them to raise prices in response.

And again, where does this all lead? According to Deutsch Bank chief economist Peter Hooper, “The tightening labor market and tightening product market will show through in a gradual pick-up in inflation,”

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